The Race Is On for The Future of Bond Trading

Shares of electronic bond-trading platform MarketAxess shares have soared, but many players are seeking a piece of the evolving market

By Telis Demos

Rick McVey, CEO of MarketAxess. The electronic bond-trading company recently reported a 30% jump in revenue. Photo: Amy Lombard for The Wall Street Journal

Wall Street has a new bond king. But as always, there are rivals for the crown.

Last week, MarketAxess MKTX -1.54%▲ reported a 30% jump in revenue and 40% jump in net income, both ahead of expectations. The company is in the business of electronic bond trading, offering venues and tools for banks, investment managers and others to trade corporates, munis and other instruments without picking up the phone.

Though stocks and currencies have long gone the way of trading automatically or by click-in centralized marketplaces, about 70% of investment-grade bonds in the U.S. and more than 80% of high-yield bonds still trade much more manually, through conversations or ad hoc messages between traders and dealers, according to Greenwich Associates.

The near-universal expectation is that this share will drop precipitously over the years to come as electronification of bond trading gains ground. That gives MarketAxess, by far the biggest of a handful of electronic bond platforms, a huge runway.

But owning that opportunity comes at a steep price: About 57 times next-12-month earnings for MarketAxess, on par with ultra-popular consumer-facing technology names like Square or Netflix.

At that nosebleed level, the main question is whether anything could start to impinge on the company’s growth story. After a huge run, the shares have already corrected a bit in September’s rotation out of momentum stocks, coming off a peak valuation of around 70 times.

One risk is that big banks’ desks figure out a way to keep more trade execution share for themselves, in part by setting up direct electronic links to clients. Dealers, for example, have recently embraced a new way to trade bonds called portfolio trading, which encourages clients to trade baskets of bonds rather than individual ones. This could, in theory, shift some trading away from electronic marketplaces. Already, about 2% to 4% of bond volume is now being traded in such portfolios, MarketAxess said Wednesday.

Things move quickly in this world, though. MarketAxess says it too is introducing a product designed to help clients price and execute portfolio trades. Portfolio trading could even spur more electronic trades, Marketaxess noted, as balance-sheet-constrained banks look to unload risk. Nonbank ETF market-makers are emerging as some big electronic customers, and might be drawn in to arbitrage opportunities created by this dynamic.

Perhaps the biggest unknown is the competitive landscape. There are many players in electronic fixed-income trading, from Bloomberg to BlackRock,that stand to have roles as the market matures. The growing electronic pie may enable all to keep growing for a long time.

But some big names will also be competing head-to-head. Recently listed Tradeweb Marketsis already handling some portfolio trading and has nabbed share of corporates trading by linking bonds to its big Treasurys rate trading business. MarketAxess recently acquired a smaller Treasurys platform it hopes to expand.

Stock-and-futures giant Intercontinental Exchange,known as ICE, has bought bond marketplaces, such as BondPoint, and bond data providers, such as IDC, in recent years. It is beginning to unveil its own strategy for how it will unite those assets and tackle the bond market holistically. ICE says its new ETF hub will help it compete directly for institutional bond trade execution.

ICE and Tradeweb are set to report earnings in the coming weeks. Investors in MarketAxess would be wise to pay close attention.

Bond trading is going electronic, but the ultimate spoils from that transition are still up for grabs.

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